Trading and risk management are reversely related to each other. The better you understand the markets (trading) the less important the risk management.
Back when I first got into the markets(2008 crash) being 18 years old right out of high school....I was obsessed. Finance became my major, and my idea of fun would be trying to read the entire investment section of my university library. But as I learned more about the "game" and got older, I've lost my obsession. Although I am still trying to figure more and more about the hardest puzzle in the game, in the end there is more to life than money/markets. That being said, I still spend the majority of my time improving my craft, and getting myself to where I want to be. It's a part of who I am.
To see what the relation is between trading and risk management I will take two completely different scenario's and analyze them. First one: a system has 30% losing trades. Stoploss at 1% of invested capital. Maximum drawdown is 11%. Never 2 consecutive stoplosses. Trading system calculates max position that can be taken to avoid having to recover a loss by trading a smaller position due to the loss. Risk management would not be very useful as the trading system protects its positions, and its capital, by the way it trades and based on long term stats. Second one: a system has 70% losing trades. Stoploss at 5% of capital. Maximum drawdown is 50%. Many consecutive stoplosses. Risk management would be essential to survive as the trading system does not protect its positions at all and has a very bad performance. Conclusions: the better the trading system the less you really need risk management, the worse the trading system the more you really need risk management. Better trading system means less risk management, worse trading system means more risk management. So INVERSE related. My risk management: stoploss at 3 points ES. Position is calculated in such a way that, after a stoploss, I still can trade the same size to recover. All the rest is taking care of by my trading system. If it is all about risk management, how can it generate profits from a system that only has losing trades? Because that’s what you basically suggest: “Trading is about risk management and nothing else.” So risk management can make losing trades profitable??? That would be the holy grail.
Then he is wrong. Understanding the market and how to trade it, makes the profits and keeps you in the game. Has nothing to do with luck. You have (or should have) at start a mathematical plan that will give you within a certain range the outcome already at start. The only luck is when you reach the upper side of the range, the best performance that you calculated as possible reachable. Luck should be avoided as much as possible and replaced by high probabilities. If I am lucky in a profitable trade I am not happy as I always want to have max control over my trades. If luck overrules my control that is not good. My control should overrule everything.
1) trade placed 1a) trade goes into profit 30s-->15 minutes 1aa) trade is left alone till profit target is reached. 1ab) trade profit is taken immediately 1b) trade goes into loss 30s-->15 minutes 1ba) trade is left alone till break even or minimal loss. Critical time stop to exit. 1bb) trade loss is taken immediately 1bba) trade direction is reversed.
Do you find this mathematical plan by looking at charts? If so, what pattern can you identify that increase your odds over 50/50 of a winning trade? You, sir, have been fooled by randomness. Hampton